Asset-Backed Securities (ABS)

TwentyFour’s ABS team cover the whole risk spectrum available, from enhanced cash to direct asset-backed lending.

TwentyFour’s ABS team covers the whole risk spectrum available, from enhanced cash to direct asset-backed lending. The breadth and size of what we manage enables us to leverage our relationship with both issuers and banks, which can offer potentially material benefits in yield and structuring for the investors in our strategies. 

Members of the TwentyFour team are regarded as pioneers in European ABS, having been involved in the market since its first securitisations in the late 1980s. The team regularly advises European policymakers and is heavily involved in guiding the path for regulation in this sector. Accordingly, TwentyFour is recognised as one of Europe’s leading ABS managers.

What are Asset-Backed Securities?

Asset-Backed Securities (ABS) are a type of bond, typically issued by banks or other lenders.

What makes ABS different to other parts of fixed income, such as government or corporate bonds, is that they are ‘secured’ against a specially designed pool of loans with similar characteristics.

This collateral pool will typically contain thousands of high-quality loans such as mortgages, and the repayments on those assets are directed straight to investors in the bonds.

This is where the phrase ‘securitisation’ comes from – investors’ coupons are secured by the cash flowing from the regular interest and principal paid on the assets included in the pool.

Asset Thousands of assets with regular repayments and similar characteristics, such as mortgages or car loans, are pooled together.
Backed The company issuing the ABS sets up a legally separated Special Purpose Vehicle (SPV), which purchases the asset pool. The bonds investors buy are backed by the interest and principal proceeds from the asset pool. This means bondholders’ exposure is to the assets themselves rather than the seller of those assets; in an RMBS, for example, investors have exposure to the mortgages but not the bank that made those loans to customers.
Securities The company sells bonds – or securities – via the SPV to investors, who are paid directly from the repayments on the assets in the pool.

At first glance, the ABS market can look like a confusing mix of acronyms (RMBS, CLOs, Auto ABS) but they simply identify the assets backing the bonds – residential mortgages, senior secured corporate loans, auto loans.

ABS at a glance

The European ABS market is split broadly into four areas, though certain sub-sets of these sectors are considered important distinct products in their own right, such as Auto ABS and Credit Card ABS.

Residential Mortgage-Backed Securities (RMBS) are backed by pools of mortgage loans extended by banks and other financial institutions. They represent the largest component of the European ABS market and they are also normally the most liquid. RMBS itself includes sub-categories such as Prime, Non-conforming and Buy-to-Let RMBS, broadly defined by the typical profile of borrower in the pool.

Consumer Receivables (Consumer ABS) include a large variety of unsecured consumer debt types that have been securitised including auto loans, credit card receivables and unsecured personal loans.

Commercial Mortgage-Backed Securities (CMBS) are backed by commercial mortgages rather than residential mortgages, and use structures similar to other forms of ABS.

Collateralised Loan Obligations (CLOs) are pools of corporate loans, refinanced in a securitised structure. Pools can be static or actively managed by a specialist loan manager.

Why invest?

  • ABS normally offers a higher yield for a given rating or maturity than more mainstream investments such as government or corporate bonds
  • ABS are virtually all floating rate, meaning they are naturally expected to be far less volatile than fixed rate bonds in periods when interest rates are volatile.
  • Built-in features such as credit enhancement, loss-absorbing reserve funds and the legal separation of issuer and asset pool, intended to provide a level of investor protection
  • High transparency with transaction reports detailed enough to view the performance of each individual loan in the asset pool, enabling investors to conduct their own research
  • ABS remains a largely under-researched and poorly understood asset class, meaning those that put in the effort and expertise can be rewarded with a speciality  premium

Meet the team

 

Insights

TwentyFour Asset Management
TwentyFour Blog

Securitisation Written Out of UKAR Success

Last week UK Asset Resolution (UKAR) announced the sale of its final mortgage loan portfolios, bringing to a close a decade long chapter of state ownership. UKAR was set up in 2010 as a ‘bad bank’ primarily charged with housing mortgage loan portfolios from failed lenders Northern Rock and Bradford & Bingley following the global financial crisis. UKAR had assets of £94.7bn at the outset, and has now repaid in full the £48.7bn we understand was borrowed from taxpayers. It is therefore a significant milestone to come full circle from years of scathing headlines in the popular press to the full return of these assets to private hands.

Read more